The Coordination Channel of Foreign Exchange Intervention

Stefan Reitz () and Mark P. Taylor ()

No 16, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness

Keywords: foreign exchange intervention; market microstructure; nonlinear mean reversion (search for similar items in EconPapers)
JEL-codes: C10 F31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mon and nep-mst
Date: Written
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